KPMG on Understanding the Impact of Business Activity on Nature

Originally published at home.kpmg. KPMG ranked No. 16 on The DiversityInc Top 50 Companies for Diversity list in 2021.

 

By encouraging organizations to understand their impact and dependencies on nature, the Taskforce on Nature-related Financial Disclosures (TNFD) aims to incorporate nature-related risk and opportunity analysis into the heart of corporate and financial decision-making, with the ultimate aim to shift the flow of global capital towards outcomes that can benefit, rather than harm nature.

We tend to think of nature as free — but it’s not.

With more than half of the world’s economic output dependent on nature, any damage or loss to oceans, rivers, lakes, land, atmosphere and living things comes at a cost.

Nature degradation and biodiversity loss affects resources, supply chains and community wealth, decreasing the value of assets and investments and bringing considerable financial risk. Conversely, the transition to a nature-positive economy is estimated to create around 400 million new jobs and generate US$10 trillion in annual business value. Investors want to better understand these risks and opportunities to identify their own exposure and make decisions about where to direct their capital.

The Taskforce on Nature-related Financial Disclosures (TNFD) is a global, market-led, science-based and government-backed initiative that was established in response to the growing understanding that, just like climate, nature should be factored in to financial and business decisions. However, unlike climate change, where the universal measure is GHG equivalent, nature is more multi-faceted and biodiversity loss can vary significantly depending on the location.

The TNFD have today released the first beta version of a nature-related risk management and disclosure framework to accelerate the conversation on the relationship between business and nature. It is a prototype which does not yet include all aspects of a fully developed framework. It encourages a broad range of market participants, including corporates, financial institutions, asset managers, insurers, investors, analysts, regulators, stock exchanges and market service providers to better understand the impact of their business on nature, as well as nature on their business. They encourage all to get involved in the debate around how nature-related risks and opportunities can be factored into business and investment decisions and disclosed effectively.

The materials released today are working documents and kick off an 18-month phase of feedback and pilot-testing with market participants. The TNFD plan to release subsequent versions through 2022 and 2023 before launching the final framework in late 2023.

The ultimate aim is to support a shift in global financial flows towards activities that support and protect nature (driving nature positive outcomes) and away from activities that cause harm. They will do this via supporting better understanding of the issues, helping companies to understand their risks and opportunities, and providing guidance on how to disclose effectively.

Complementing existing ESG reporting

The global sustainability and ESG reporting landscape is changing, fast. The draft TNFD framework is released into an already complex landscape of reporting frameworks. However, it represents an important development in that landscape.

The mission, concept and structure of the TNFD follows that of the Taskforce on Climate-related Financial Disclosure (TCFD). This initiative has driven significant improvements in the understanding and reporting of the impact of climate on business resilience and financial performance. The TNFD aim to create the same impact on nature-related reporting. By following a consistent structure and supporting companies to link together their disclosures on climate and nature-related risks and opportunities, the two frameworks are expected to be complementary.

The TCFD has also been an important precursor to the International Sustainability Standards Board (ISSB), a new global standard setter formed by the IFRS Foundation at COP26 in November 2021. The ISSB’s future standards are expected to follow a structure that is consistent with TCFD and therefore, also now the TNFD’s draft framework. In advance of the ISSB releasing its own standard on nature-related disclosure, the TNFDs releases may provide useful guidance for companies wanting to get ahead in disclosing how nature impacts and is impacted by their business.

Embracing ‘natural capital’

Nature is rising higher on investors’ and regulators’ agendas. Capital has traditionally been thought of only as money, but capital describes any resource or asset that stores or provides value to people and the economy. Natural capital is a way of thinking about nature in much the same way as traditional capital — if we invest in it, it creates value, and if we degrade it, we limit its value. It’s time for companies to embrace this concept and engage with what the TNFD are trying to do.

Get involved — the TNFDs materials are designed to help market participants identify how they are exposed and to get ready to start reporting on their exposure to nature-related risks in value chains and investment portfolios. The aim is also to seize the opportunity nature provides to transform and future-proof business models, supply-chains, products, services and establishing metrics, targets and internal reporting processes.

By applying the new TNFD framework, users can start to value nature in the same way as traditional capital, and to equip business, asset managers and insurers to make better, nature-smart decisions.

Click here to read the comprehensive review of the TNFD beta framework update.

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